Red Sea Crisis

On Nov 19, 2023, a video footage was released by a Houthi armed group on a helicopter assault on MV Galaxy Leader. It has stunned the world, especially shipping liners, on how this cargo ship was eventually hijacked. Having said that, the global freight rates remained calm, perceiving the hijack as only an isolated case. The global container freight index (Figure 1) remained low at US$1384 one week after the hijack.

A month later, the Houthi rebels made their presence felt again with the drone attacks targeting two cargo vessels, MSC Clara and Swan Atlantic, on Dec 18, 2023. This has disrupted the maritime trade and the global container freight index reacted to this and surged to US$1661 on Dec 21.

Then, on Jan 4, 2024, when Maersk announced that it has re-routed four of five container vessels that were stuck in the Red Sea towards the Suez Canal and the long journey around Africa to avoid the risk of attack. The index spiked to US$2,670 on the same day. It climbed higher to US$3,072 on Jan 11 as more and more shipping liners are avoiding the Red Sea and taking the long route around Africa.

Direct Beneficiary

The spike in shipping cost, resulted from higher cost of operations (e.g. cost of insurance and fuel consumption), has lent support to the shares of major shipping firms including Maersk, Hapag-Lloyd, Cosco and Evergreen (Figure 2). It was obvious that share prices reached the inflection points in mid-Dec, then soared to the peak with average gain of 36% in early-Jan and closed with average gain of 28% last Friday. The tension in Red Sea has helped shipping companies regain some lost ground.

Local Maritime Players Comment

From our channel checks, one of the local freight forwarders said that most carriers have re-routed vessels via the Cape of Good Hope and this will cause shipment delays. The impact will be visible from January 2024 onwards with increasing blank sailings affecting not only Red Sea but other trade lanes such as Mediterranean. There will be shortage of space due to the blank sailings and possibility of equipment shortage.

However, there has been no shipment delay as of last week when we checked with Westports. Nevertheless, the management said it is too early to comment as the affected vessels will arrive in 2 weeks. Management expects a minor impact on the volume but the impact will not be as severe as Covid period.

A local warehouse and logistics operator said the impact on land transportation and warehousing would be minimal but its customers may raise product prices to mitigate hike in shipping costs. Having said that, the hike is expected to be moderate as the current shipping cost is still way below the Covid-time. Note that the global containers index was peak at USD10,377 level in Sep 2021 versus current level of USD3,072.

Our View

From our past observations, freight forwarders and warehouse operators would benefit when there is any disruption to global shipping. The impact is usually positively correlated with the duration and severity of the disruption. For port operator, the impact is muted as the decline in revenue due to lower container throughput would be offset by higher storage income.

For Red Sea incident, we believe local maritime players would benefit indirectly from the gradual rise in global shipping rates and the impact would depend on the situation of Israel-Hamas war. We also believe the benefit would spill over to local logistics and warehousing operators if the war continues for an extended period as Malaysian manufacturers are expected to increase storage of raw materials to avoid production disruption. The positive implications have already reflected in the recent share price performance of logistics and port counters (Figure 3), in our opinion.

We reiterate our view that third-party logistics (3PL) will play an important role in strengthening the overall supply-chain management due to proliferation of trade conflicts and geopolitical tensions. The 3PL operators enable various warehousing processes, procurement and distribution of raw material, a unification between freight and customs and expedite shipment of goods. Importantly, the additional cost of having the 3PL service is insignificant if compared to the cost of operation disruptions, which is unbearable.

Recommendation

We remain sanguine on the long-term prospects of 3PL management as far as global risk management is concerned. Thus, it is justifiable in ascribing the peak sector PE multiple of 16x in valuing the 3PL industry, underscoring the bullish earnings outlook. For stock specific, we value CJ Century, being the only 3PL company under our coverage, at RM0.50/share, using a PE multiple of 14x to reflect its market capitalisation, which is relatively small (Figure 4).

For Westports, being the only port operator under our coverage, we value the stock using DDM valuation approach given its earnings and dividend sustainability. We raise Westports’ DDM valuation higher to RM4.20/share (from RM4.03 previously) after revising our risk-free rate assumption lower to 4.0% (from 4.5% previously).

Source: TA Research - 16 Jan 2024